Borrowing money in local currencies

[sanjose04]

Hi, David.

I have a question regarding foreign exchange risk.

In a book dealing with foreign exchange risk it says, “Companies can reduce their exposure to the exchange rate component of risk by borrowing in the local currency to fund projects.” However, I don’t really get it. I think even if we do fund our projects in local currency we do share a fair amount risk, because we have to eventually repatriate the money back to our home country. Is it like, in the case we don’t repatriate our money back to our home country is the case that we don’t confront foreign exchange risk? I’m a little bit confused about this one.

Thank you.

 

[kurtis]

Borrowing funds in LCY excludes FX risk because the Company won`t carry about to buy the currency other than the Companys revenues. However, if the Company receives revenues in FCY, then FX risk becomes at the bottom.